The Russian bankruptcy trade-off

by Dmitry Pikalov, IA Group

A credit insurance company entrusted IA to handle a claim of their customer - a Chinese supplier of electronic goods - against a debtor in Russia. The claim amounted to USD 2.5 million for media devices supplied by the Chinese company.

At first, the documents IA received from the client did not indicate any disputes. It appeared to be a relatively straightforward debt to collect. IA contacted the debtor, and they confirmed the amount of the transaction though they refused to acknowledge it as due. The debtor mentioned that they had numerous quality complaints as well as a counterclaim against the supplier.

A meeting was scheduled with the debtor at their offices in Moscow the next day. During the meeting, the debtor explained that they worked as a distributor for the supplier. But the supplier had recently canceled the distributorship. The debtor alleged substantial expenses (e.g., advertisements, premiums, etc.) for which the supplier had previously compensated the debtor. Furthermore, the debtor alleged that the goods from recent shipments had numerous quality problems in hardware and software, which had to be fixed at the debtor’s expense. All those expenses added up to the debtor's counterclaim of around USD 1 million against the Chinese supplier. The supplier rejected the counterclaim - for the most part.

In the meantime, IA’s team investigated the legal and financial situation of the debtor company. The available financial and court data showed that the debtor’s business model was based exclusively on the distributorship from the supplier. Without the distributorship status, the debtor's financial state deteriorated rapidly. There were numerous claims from other creditors. Although the debtor had some assets, those would not be sufficient to cover the claims of all creditors. A bankruptcy was luring.

IA advised their client that it was not in the supplier’s interest to wait until the debtor would fall into bankruptcy and proposed to find an out-of-court solution before a bankruptcy procedure would be initiated by a third-party creditor. With the client’s approval, IA arranged a meeting with the Chinese supplier and the Russian debtor.

After an initial discussion, the meeting rapidly grew into heated arguments and mutual accusations. IA’s team interfered and split up the sessions to temper the emotions. IA’s negotiators continued ‘shuttle diplomacy’ by moving back and forth between the meeting rooms effectively communicating towards a solution.

The mediation effort led the supplier to acknowledge a part of the counterclaim, while the debtor gave up some of their dispute allegations. The supplier insisted for IA to terminate the distributorship agreement with the debtor. Thus, it became clear to IA’s team that the debtors’ company would fall into bankruptcy relatively soon. A quick and enforceable settlement was required to safeguard the supplier’s interests.

Under IA’s mediation, parties reached a solution where the debtor paid USD 1.5 million as a final settlement. At the same time, the supplier agreed not to be involved in any actions leading to the debtor's bankruptcy. IA’s lawyers swiftly drafted a settlement agreement. The debtor paid the settlement amount within two weeks.

The supplier recovered a substantial part of the outstanding debt through IA’s legal expertise and negotiation skills. Otherwise, the debtor would likely have had to declare bankruptcy in any other situation, and the supplier would not have seen a dime.